PIC INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 1, 2000
AS REVISED JUNE 30, 2000
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus of the Provident Investment
Counsel Balanced Fund A, Provident Investment Counsel Growth Fund A, Provident
Investment Counsel Mid Cap Fund A, Provident Investment Counsel Small Company
Growth Fund A, Provident Investment Counsel Growth Fund B, Provident Investment
Counsel Mid Cap Fund B, Provident Investment Counsel Small Company Growth Fund
B, Provident Investment Counsel Mid Cap Fund C, and Provident Investment Counsel
Small Company Growth Fund C, series of PIC Investment Trust (the "Trust"), which
share a common prospectus dated March 1, 2000 as revised on May 1, 2000 and June
1, 2000. There are two other series of the Trust: Provident Investment Counsel
Growth Fund I and Provident Investment Counsel Small Cap Growth Fund I. The
Provident Investment Counsel Balanced Fund A (the "Balanced Fund") invests in
the PIC Balanced Portfolio; the Provident Investment Counsel Growth Fund A and
the Provident Investment Counsel Growth Fund B (the "Growth Funds") invest in
the PIC Growth Portfolio; the Provident Investment Counsel Mid Cap Fund A, the
Provident Investment Counsel Mid Cap Fund B and the Provident Investment Counsel
Mid Cap Fund C (the "Mid Cap Funds") invest in the PIC Mid Cap Portfolio; the
Provident Investment Counsel Small Company Growth Fund A, the Provident
Investment Counsel Small Company Growth Fund B and the Provident Investment
Counsel Small Company Growth Fund C (the "Small Company Growth Funds") invest in
the PIC Small Cap Portfolio. (In this SAI, the Balanced Fund, the Growth Funds,
the Mid Cap Funds and the Small Company Growth Funds may be referred to as the
"Funds," and the PIC Balanced Portfolio, PIC Growth Portfolio, PIC Mid Cap
Portfolio and PIC Small Cap Portfolio may be referred to as the "Portfolios.")
Provident Investment Counsel (the "Advisor") is the Advisor to the Portfolios. A
copy of the Funds' prospectus may be obtained from the Trust at 300 North Lake
Avenue, Pasadena, CA 91101-4106, telephone (818) 449-8500.
TABLE OF CONTENTS
Investment Objectives and Policies...........................................B-3
Investment Restrictions......................................................B-9
Management..................................................................B-11
Custodian and Auditors......................................................B-20
Portfolio Transactions and Brokerage........................................B-20
Portfolio Turnover..........................................................B-21
Additional Purchase and Redemption Information..............................B-22
Net Asset Value.............................................................B-22
Taxation ...................................................................B-22
Dividends and Distributions.................................................B-23
Performance Information.....................................................B-24
General Information.........................................................B-26
Financial Statements........................................................B-27
Appendix ...................................................................B-28
B-1
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INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
Each Fund seeks to achieve its investment objective by investing all of its
assets in a PIC Portfolio. Each Portfolio is a separate registered investment
company with the same investment objective as the Fund. Since a Fund will not
invest in any securities other than shares of a Portfolio, investors in the Fund
will acquire only an indirect interest in the Portfolio. Each Fund's and
Portfolio's investment objective cannot be changed without shareholder approval.
In addition to selling its shares to a Fund, a Portfolio may sell its
shares to other mutual funds or institutional investors. All investors in a
Portfolio invest on the same terms and conditions and pay a proportionate share
of the Portfolio's expenses. However, other investors in a Portfolio may sell
their shares to the public at prices different from those of a Fund as a result
of the imposition of sales charges or different operating expenses. You should
be aware that these differences may result in different returns from those of
investors in other entities investing in a Portfolio. Information concerning
other holders of interests in a Portfolio is available by calling (800)
618-7643.
The Trustees of the Trust believe that this structure may enable a Fund to
benefit from certain economies of scale, based on the premise that certain of
the expenses of managing an investment portfolio are relatively fixed and that a
larger investment portfolio may therefore achieve a lower ratio of operating
expenses to net assets. Investing a Fund's assets in a Portfolio may produce
other benefits resulting from increased asset size, such as the ability to
participate in transactions in securities which may be offered in larger
denominations than could be purchased by the Fund alone. A Fund's investment in
a Portfolio may be withdrawn by the Trustees at any time if the Board determines
that it is in the best interests of a Fund to do so. If any such withdrawal were
made, the Trustees would consider what action might be taken, including the
investment of all of the assets of a Fund in another pooled investment company
or the retaining of an investment advisor to manage the Fund's assets directly.
Whenever a Fund is requested to vote on matters pertaining to a Portfolio,
the Fund will hold a meeting of its shareholders, and the Fund's votes with
respect to the Portfolio will be cast in the same proportion as the shares of
the Fund for which voting instructions are received.
THE BALANCED FUND. The investment objective of the Balanced Fund is to
provide high total return while reducing risk. The Balanced Fund may also
attempt to earn current income and reduce the variability of the net asset value
of their shares by investing a portion of their assets in short-term
investments. Normally, these investments will range from 0 to 20% of their
assets. There is no assurance that the Balanced Fund will achieve their
objective. The Balanced Fund will attempt to achieve their objective by
investing all of their assets in shares of the PIC Balanced Portfolio (the
"Balanced Portfolio"). The Balanced Portfolio is a diversified open-end
management investment company having the same investment objective as the
Balanced Fund. The discussion below supplements information contained in the
prospectus as to investment policies of the Balanced Fund and the Balanced
Portfolio. Because the investment characteristics of the Balanced Fund will
correspond directly to those of the Balanced Portfolio, the discussion refers to
those investments and techniques employed by the Balanced Portfolio.
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THE GROWTH FUNDS. The investment objective of the Growth Funds is to
provide long-term growth of capital. There is no assurance that the Growth Funds
will achieve their objective. The Growth Funds will attempt to achieve their
objective by investing all of their assets in shares of the PIC Growth Portfolio
(the "Growth Portfolio"). The Growth Portfolio is a diversified open-end
management investment company having the same investment objective as the Growth
Funds. The discussion below supplements information contained in the prospectus
as to investment policies of the Growth Funds and the Growth Portfolio. Because
the investment characteristics of the Growth Funds will correspond directly to
those of the Growth Portfolio, the discussion refers to those investments and
techniques employed by the Growth Portfolio.
THE MID CAP FUNDS. The investment objective of the Mid Cap Funds is to
provide long-term growth of capital. There is no assurance that the Mid Cap
Funds will achieve their objective. The Mid Cap Funds will attempt to achieve
their objective by investing all of their assets in shares of the PIC Mid Cap
Portfolio (the "Mid Cap Portfolio"). The Mid Cap Portfolio is a diversified
open-end management investment company having the same investment objective as
the Mid Cap Funds. The discussion below supplements information contained in the
prospectus as to investment policies of the Mid Cap Funds and the Mid Cap
Portfolio. Because the investment characteristics of the Mid Cap Funds will
correspond directly to those of the Mid Cap Portfolio, the discussion refers to
those investments and techniques employed by the Mid Cap Portfolio.
THE SMALL COMPANY GROWTH FUNDS. The investment objective of the Small
Company Growth Funds is to provide capital appreciation. There is no assurance
that the Small Company Growth Funds will achieve their objective. The Small
Company Growth Funds will attempt to achieve their objective by investing all of
their assets in shares of the PIC Small Cap Portfolio (the "Small Cap
Portfolio"). The Small Cap Portfolio is a diversified open-end management
investment company having the same investment objective as the Small Company
Growth Funds. The discussion below supplements information contained in the
prospectus as to investment policies of the Small Company Growth Funds and the
Small Cap Portfolio. Because the investment characteristics of the Small Company
Growth Funds will correspond directly to those of the Small Cap Portfolio, the
discussion refers to those investments and techniques employed by the Small Cap
Portfolio.
SECURITIES AND INVESTMENT PRACTICES
The discussion below supplements information contained in the prospectus as
to investment policies of the Portfolios. PIC may not buy all of these
instruments or use all of these techniques to the full extent permitted unless
it believes that doing so will help a Portfolio achieve its goals.
EQUITY SECURITIES. Equity securities are common stocks and other kinds of
securities that have the characteristics of common stocks. These other
securities include bonds, debentures and preferred stocks which can be converted
into common stocks. They also include warrants and options to purchase common
stocks.
SHORT-TERM INVESTMENTS. Short-term investments are debt securities that
mature within a year of the date they are purchased by a Portfolio. Some
specific examples of short-term investments are commercial paper, bankers'
acceptances, certificates of deposit and repurchase agreements. A Portfolio will
only purchase short-term investments which are "high quality," meaning the
investments have been rated A-1 by Standard & Poor's Ratings Group ("S&P") or
B-4
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Prime-1 by Moody's Investors Service, Inc. ("Moody's"), or have an issue of debt
securities outstanding rated at least A by S&P or Moody's. The term also applies
to short-term investments that PIC believes are comparable in quality to those
with an A-1 or Prime-1 rating. U.S. Government securities are always considered
to be high quality.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Fund or a Portfolio purchases a security from a bank or recognized securities
dealer and simultaneously commits to resell that security to the bank or dealer
at an agreed-upon date and price reflecting a market rate of interest unrelated
to the coupon rate or maturity of the purchased security. The purchaser
maintains custody of the underlying securities prior to their repurchase; thus
the obligation of the bank or dealer to pay the repurchase price on the date
agreed to is, in effect, secured by such underlying securities. If the value of
such securities is less than the repurchase price, the other party to the
agreement will provide additional collateral so that at all times the collateral
is at least equal to the repurchase price.
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Funds and the Portfolios intend to enter
into repurchase agreements only with banks and dealers believed by the Advisor
to present minimum credit risks in accordance with guidelines established by the
Boards of Trustees. The Advisor will review and monitor the creditworthiness of
such institutions under the Boards' general supervision. To the extent that the
proceeds from any sale of collateral upon a default in the obligation to
repurchase were less than the repurchase price, the purchaser would suffer a
loss. If the other party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to bankruptcy or other liquidation proceedings, there
might be restrictions on the purchaser's ability to sell the collateral and the
purchaser could suffer a loss. However, with respect to financial institutions
whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy
Code, the Funds and the Portfolios intend to comply with provisions under such
Code that would allow them immediately to resell the collateral.
OPTIONS ACTIVITIES. The Balanced Portfolio may write (i.e., sell) call
options ("calls") on debt securities, and the Small Cap Portfolio may write call
options on stocks and stock indices, if the calls are "covered" throughout the
life of the option. A call is "covered" if the Portfolio owns the optioned
securities. When the Balanced or Small Cap Portfolio writes a call, it receives
a premium and gives the purchaser the right to buy the underlying security at
any time during the call period at a fixed exercise price regardless of market
price changes during the call period. If the call is exercised, the Portfolio
will forgo any gain from an increase in the market price of the underlying
security over the exercise price.
The Balanced and Small Cap Portfolios may purchase a call on securities to
effect a "closing purchase transaction," which is the purchase of a call
covering the same underlying security and having the same exercise price and
expiration date as a call previously written by the Portfolio on which it wishes
to terminate its obligation. If the Portfolio is unable to effect a closing
purchase transaction, it will not be able to sell the underlying security until
the call previously written by the Portfolio expires (or until the call is
exercised and the Portfolio delivers the underlying security).
The Balanced and Small Cap Portfolios also may write and purchase put
options ("puts"). When the Portfolio writes a put, it receives a premium and
gives the purchaser of the put the right to sell the underlying security to the
Portfolio at the exercise price at any time during the option period. When the
Portfolio purchases a put, it pays a premium in return for the right to sell the
underlying security at the exercise price at any time during the option period.
If any put is not exercised or sold, it will become worthless on its expiration
date.
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A Portfolio's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
FUTURES CONTRACTS. The Balanced Portfolio may buy and sell interest rate
futures contracts, and all the Portfolios may buy and sell stock index futures
contracts. A futures contract is an agreement between two parties to buy and
sell a security or an index for a set price on a future date. Futures contracts
are traded on designated "contract markets" which, through their clearing
corporations, guarantee performance of the contracts.
Entering into a futures contract for the sale of securities has an effect
similar to the actual sale of securities, although sale of the futures contract
might be accomplished more easily and quickly. Entering into futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities other
than the underlying securities.
A stock index futures contract may be used as a hedge by any of the
Portfolios with regard to market risk as distinguished from risk relating to a
specific security. A stock index futures contract does not require the physical
delivery of securities, but merely provides for profits and losses resulting
from changes in the market value of the contract to be credited or debited at
the close of each trading day to the respective accounts of the parties to the
contract. On the contract's expiration date, a final cash settlement occurs.
Changes in the market value of a particular stock index futures contract
reflects changes in the specified index of equity securities on which the future
is based.
There are several risks in connection with the use of futures contracts. In
the event of an imperfect correlation between the futures contract and the
portfolio position which is intended to be protected, the desired protection may
not be obtained and a Portfolio may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for a Portfolio than if it had not entered into any
futures on stock indices.
B-6
<PAGE>
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time.
FOREIGN SECURITIES. The Portfolios may invest in securities of foreign
issuers in foreign markets. In addition, the Portfolios may invest in American
Depositary Receipts ("ADRs"), which are receipts, usually issued by a U.S. bank
or trust company, evidencing ownership of the underlying securities. Generally,
ADRs are issued in registered form, denominated in U.S. dollars, and are
designed for use in the U.S. securities markets. A depositary may issue
unsponsored ADRs without the consent of the foreign issuer of securities, in
which case the holder of the ADR may incur higher costs and receive less
information about the foreign issuer than the holder of a sponsored ADR. A
Portfolio may invest no more than 20% of its total assets in foreign securities,
and it will only purchase foreign securities or ADRs which are listed on a
national securities exchange or included in the NASDAQ system.
Foreign securities and securities issued by U.S. entities with substantial
foreign operations may involve additional risks and considerations. These
include risks relating to political or economic conditions in foreign countries,
fluctuations in foreign currencies, withholding or other taxes, operational
risks, increased regulatory burdens and the potentially less stringent investor
protection and disclosure standards of foreign markets. All of these factors can
make foreign investments, especially those in developing countries, more
volatile.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Portfolios may enter into
forward contracts with respect to specific transactions. For example, when a
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when it anticipates the receipt in a
foreign currency of dividend or interest payments on a security that it holds,
the Portfolio may desire to "lock in" the U.S. dollar price of the security or
the U.S. dollar equivalent of the payment, by entering into a forward contract
for the purchase or sale, for a fixed amount of U.S. dollars or foreign
currency, of the amount of foreign currency involved in the underlying
transaction. The Portfolio will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
B-7
<PAGE>
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency a Portfolio is obligated
to deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Portfolio to sustain
losses on these contracts and transaction costs. The Portfolios may enter into
forward contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Portfolio to deliver an
amount of foreign currency in excess of the value of the Portfolio's securities
or other assets denominated in that currency or (2) the Portfolio maintains a
segregated account as described below. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Advisor believes it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of a
Portfolio will be served.
At or before the maturity date of a forward contract that requires a
Portfolio to sell a currency, the Portfolio may either sell a security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Portfolio
would realize a gain or loss as a result of entering into such an offsetting
forward contract under either circumstance to the extent the exchange rate
between the currencies involved moved between the execution dates of the first
and second contracts.
The cost to a Portfolio of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities a Portfolio owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
B-8
<PAGE>
SEGREGATED ACCOUNTS. When a Portfolio writes an option, sells a futures
contract or enters into a forward foreign currency exchange contract, it will
establish a segregated account with its custodian bank, or a securities
depository acting for it, to hold assets of the Portfolio in order to insure
that the Portfolio will be able to meet its obligations. In the case of a call
that has been written, the securities covering the option will be maintained in
the segregated account and cannot be sold by a Portfolio until released. In the
case of a put that has been written or a forward foreign currency contract that
has been entered into, liquid securities will be maintained in the segregated
account in an amount sufficient to meet a Portfolio's obligations pursuant to
the put or forward contract. In the case of a futures contract, liquid
securities will be maintained in the segregated account equal in value to the
current value of the underlying contract, less the margin deposits. The margin
deposits are also held, in cash or U.S. Government securities, in the segregated
account.
DEBT SECURITIES AND RATINGS. Ratings of debt securities represent the
rating agencies' opinions regarding their quality, are not a guarantee of
quality and may be reduced after a Portfolio has acquired the security. The
Advisor will consider whether the Portfolio should continue to hold the security
but is not required to dispose of it. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than the rating indicates.
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Funds) and the Portfolios have adopted the
following restrictions as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority," as defined in the Investment
Company Act of 1940 (the "1940 Act"), of the outstanding voting securities of a
Fund or a Portfolio. Under the 1940 Act, the "vote of the holders of a majority
of the outstanding voting securities" means the vote of the holders of the
lesser of (i) 67% of the shares of a Fund or a Portfolio represented at a
meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of a Fund or a
Portfolio. Except with respect to borrowing, changes in values of assets of a
particular Fund or Portfolio will not cause a violation of the investment
restrictions so long as percentage restrictions are observed by such Fund or
Portfolio at the time it purchases any security.
As a matter of fundamental policy, the Portfolios are diversified; i.e., as
to 75% of the value of a Portfolio's total assets, no more than 5% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities). The Funds invest all of their assets in shares
of the Portfolios. Each Fund's and each Portfolio's investment objective is
fundamental.
In addition, no Fund or Portfolio may:
1. Issue senior securities, borrow money or pledge its assets, except that
a Fund or a Portfolio may borrow on an unsecured basis from banks for temporary
or emergency purposes or for the clearance of transactions in amounts not
exceeding 10% of its total assets (not including the amount borrowed), provided
that it will not make investments while borrowings in excess of 5% of the value
of its total assets are outstanding;
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2. Make short sales of securities or maintain a short position;
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
4. Write put or call options, except that the Balanced Portfolio may write
covered call and cash secured put options on debt securities, and the Small Cap
Portfolio may write covered call and cash secured put options and purchase call
and put options on stocks and stock indices;
5. Act as underwriter (except to the extent a Fund or Portfolio may be
deemed to be an underwriter in connection with the sale of securities in its
investment portfolio);
6. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities), except that any of the Funds may invest more than 25% of
their assets in shares of a Portfolio;
7. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although any Portfolio may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
8. Purchase or sell commodities or commodity futures contracts, except that
any Portfolio may purchase and sell stock index futures contracts and the
Balanced Portfolio may purchase and sell interest rate futures contracts;
9. Invest in oil and gas limited partnerships or oil, gas or mineral
leases;
10. Make loans (except for purchases of debt securities consistent with the
investment policies of the Funds and the Portfolios and except for repurchase
agreements); or
11. Make investments for the purpose of exercising control or management.
The Portfolios observe the following restrictions as a matter of operating
but not fundamental policy.
No Portfolio may:
1. Invest more than 10% of its assets in the securities of other investment
companies or purchase more than 3% of any other investment company's voting
securities or make any other investment in other investment companies except as
permitted by federal and state law; or
2. Invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities issued under Rule 144A which are
determined by the Board of Trustees to be liquid).
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MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
Likewise, the Portfolios each have a Board of Trustees which have comparable
responsibilities, including approving agreements with the Advisor. The day to
day operations of the Trust and the Portfolios are delegated to their officers,
subject to their investment objectives and policies and to general supervision
by their Boards of Trustees.
The following table lists the Trustees and officers of the Trust, their
business addresses and principal occupations during the past five years. Unless
otherwise noted, each individual has held the position listed for more than five
years.
<TABLE>
<CAPTION>
Name, Address Position(s) Held
and Age With the Trust Principal Occupation(s) During Past 5 Years
------- -------------- -------------------------------------------
<S> <C> <C>
Douglass B. Allen* (age 37) Trustee and Vice President of the Advisor
300 North Lake Avenue President
Pasadena, CA 91101
Jettie M. Edwards (age 53) Trustee Consulting principal of Syrus Associates (consulting firm)
76 Seaview Drive
Santa Barbara, CA 93108
Richard N. Frank (age 76) Trustee Chief Executive Officer, Lawry's Restaurants, Inc.;
234 E. Colorado Blvd. formerly, Chairman of Lawry's Foods, Inc.
Pasadena, CA 91101
James Clayburn LaForce Trustee Dean Emeritus, John E. Anderson Graduate School of
(age 76) Management, University of California, Los Angeles.
P.O. Box 1585 Director of The BlackRock Funds. Trustee of Payden
Pauma Valley, CA 92061 & Rygel Investment Trust. Director of the Timken
Co., Rockwell International, Eli Lily, Jacobs
Engineering Group and Imperial Credit Industries.
Anthony R. Mozilo (age 60) Trustee Vice Chairman and Executive Vice President of Countrywide
155 N. Lake Avenue Credit Industries (mortgage banking)
Pasadena, CA 91101
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of Avery Dennison
150 N. Orange Grove Blvd. Corporation (pressure sensitive material and
Pasadena, CA 91103 office products manufacturer)
Thomas J. Condon* (age 61) Trustee Managing Director of the Advisor.
300 North Lake Avenue
Pasadena, CA 91101
Aaron W.L. Eubanks, Sr. Vice President Senior Vice President of the Advisor.
(age 37) and Secretary
300 North Lake Avenue
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
</TABLE>
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The following table lists the Trustees and officers of each of the
Portfolios, their business addresses and principal occupations during the past
five years. Unless otherwise noted, each individual has held the position listed
for more than five years.
<TABLE>
<CAPTION>
Name, Address Position(s) Held
and Age With the Portfolios Principal Occupation(s) During Past 5 Years
------- ------------------- -------------------------------------------
<S> <C> <C>
Douglass B. Allen* (age 37) Trustee and Vice President of the Advisor
300 North Lake Avenue President
Pasadena, CA 91101
Jettie M. Edwards (age 53) Trustee Consulting principal of Syrus Associates (consulting firm)
76 Seaview Drive
Santa Barbara, CA 93108
Richard N. Frank (age 76) Trustee Chief Executive Officer, Lawry's Restaurants, Inc.;
234 E. Colorado Blvd. formerly, Chairman of Lawry's Foods, Inc.
Pasadena, CA 91101
James Clayburn LaForce Trustee Dean Emeritus, John E. Anderson Graduate School of
(age 76) Management, University of California, Los Angeles.
P.O. Box 1585 Director of The BlackRock Funds. Trustee of Payden
Pauma Valley, CA 92061 & Rygel Investment Trust. Director of the Timken
Co., Rockwell International, Eli Lily, Jacobs
Engineering Group and Imperial Credit Industries.
Anthony R. Mozilo (age 60) Trustee Vice Chairman and Executive Vice President of Countrywide
155 N. Lake Avenue Credit Industries (mortgage banking)
Pasadena, CA 91101
Wayne H. Smith (age 58) Trustee Vice President and Treasurer of Avery Dennison Corporation
150 N. Orange Grove Blvd. (pressure sensitive material and office products manufacturer)
Pasadena, CA 91103
Thomas J. Condon* (age 61) Trustee Managing Director of the Advisor.
300 North Lake Avenue
Pasadena, CA 91101
Aaron W.L. Eubanks, Sr. Vice President Senior Vice President of the Advisor.
(age 37) and Secretary
300 North Lake Avenue
Pasadena, CA 91101
William T. Warnick (age 31) Vice President Vice President of the Advisor
300 North Lake Avenue and Treasurer
Pasadena, CA 91101
</TABLE>
----------
* denotes Trustees who are "interested persons" of the Trust or Portfolios
under the 1940 Act.
B-12
<PAGE>
The following compensation was paid to each of the following Trustees. No
other compensation or retirement benefits were received by any Trustee or
officer from the Registrant or other registered investment company in the "Fund
Complex."
<TABLE>
<CAPTION>
Deferred Deferred Total
Compensation Compensation Compensation
Aggregate Aggregate Accrued as Part Accrued as Part From Trust and
Compensation Compensation of Trust of Portfolios Portfolios paid to
Name of Trustee from Trust from Portfolios Expenses Expenses Trustee
--------------- ---------- --------------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Jettie M. Edwards $10,000 $ -0- $ -0- $ -0- $10,000
Wayne H. Smith $ -0- $ -0- $15,500 $ 1,158 $16,658
Richard N. Frank $ -0- $ -0- $ 658 $12,000 $12,658
James Clayburn LaForce $ 2,500 $12,000 $ -0- $ -0- $14,500
Angelo R. Mozilo $ -0- $ -0- $ 1,158 $ -0- $ 1,158
</TABLE>
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Balanced Fund A as of January 31, 2000:
Gilbert Papazian - 14.48%
Hillsborough, CA 94010
Sanwa Bank California, Trustee - 5.44%
Los Angeles, CA 90060
Straffe & Co. FBO - 9.46%
Safelite Glass
Westerville, OH 43086
UMBSC & Co, Trustee - 49.34%
Kansas City, MO 64141
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Growth Fund A as of January 31, 2000:
Wilmington Trust Co. FBO
Mustang Employee 401K - 75.02%
Wilmington, DE 19899
William A Eddy and
Joan D. Eddy, Trustees - 14.89%
Long Beach, CA 90815
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Mid Cap Fund A as of January 31, 2000:
Larry D. Tashjian and
Karen D. Tashjian, Trustees - 9.78%
La Canada, CA 91011
George E. Handtmann III, Trustee - 10.84%
Carpinteria, CA 93013
B-13
<PAGE>
Jeffrey J. Miller and
Paula J. Miller, Trustees - 5.86%
La Canada, CA 91011
Robert M. Kommerstad and
Lila M. Kommerstad, Trustees - 5.86%
Bradbury, CA 91010
Thomas J and Julie H. Condon, Trustees - 9.81%
San Marina, CA 91108
Merrill Lynch - 15.14%
Jacksonville, FL 32246
Donald H. Neu - 5.22%
San Marino, CA 91108
Donaldson Lufkin & Jenrette
Secs. Corp. - 9.65%
Jersey City, NJ 07303
The following persons, to the knowledge of the Trust, owned more than 5% of
the outstanding shares of the Small Company Growth Fund A as of January 31,
2000:
Merrill Lynch, for benefit of
Building One Fund Admin Team A - 53.49%
Jacksonville, FL 32246
IITC - 5.66%
Boulder, CO 80503
To the knowledge of the Trust, as of January 31, 2000, Merrill Lynch, for
sole benefit of its customers, Jacksonville, FL 32246 and Robert Baird Co.,
Inc., Milwaukee, WI 53202, owned 99.43% and 13.98%, respectively, of the
outstanding shares of the Growth Fund B.
To the knowledge of the Trust, as of January 31, 2000, Merrill Lynch, for
sole benefit of its customers, Jacksonville, FL 32246 owned 99.03% of the
outstanding shares of the Mid Cap Fund B.
To the knowledge of the Trust, as of January 31, 2000, Merrill Lynch, for
sole benefit of its customers, Jacksonville, FL 32246 owned 99.61% of the
outstanding shares of the Small Company Growth Fund B.
As of January 30, 2000, shares of the Funds owned by the Trustee and
officers as a group were less than 1%.
B-14
<PAGE>
THE ADVISOR
The Trust does not have an investment advisor, although the Advisor
performs certain administrative services for it, including providing certain
officers and office space.
The following information is provided about the Advisor and the Portfolios.
Subject to the supervision of the Boards of Trustees of the Portfolios,
investment management and services will be provided to the Portfolios by the
Advisor, pursuant to separate Investment Advisory Agreements (the "Advisory
Agreements"). Under the Advisory Agreements, the Advisor will provide a
continuous investment program for the Portfolios and make decisions and place
orders to buy, sell or hold particular securities. In addition to the fees
payable to the Advisor and the Athe Portfolios and the Trust are responsible for
their operating expenses, including: (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of
Trustees other than those affiliated with the Advisor or the Administrator; (v)
legal and audit expenses; (vi) fees and expenses of the custodian, shareholder
service and transfer agents; (vii) fees and expenses for registration or
qualification of the Trust and its shares under federal or state securities
laws; (viii) expenses of preparing, printing and mailing reports and notices and
proxy material to shareholders; (ix) other expenses incidental to holding any
shareholder meetings; (x) dues or assessments of or contributions to the
Investment Company Institute or any successor; (xi) such non-recurring expenses
as may arise, including litigation affecting the Trust or the Portfolios and the
legal obligations with respect to which the Trust or the Portfolios may have to
indemnify their officers and Trustees; and (xii) amortization of organization
costs.
The Advisor is an indirect, wholly owned subsidiary of United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed holding company
principally engaged, through affiliated firms, in providing institutional
investment management services. On February 15, 1995, UAM acquired the assets of
the Advisor's predecessor, which had the same name as the Advisor; on that date
the Advisor entered into new Advisory Agreements having the same terms as the
previous Advisory Agreements with the Portfolios. The term "Advisor" also refers
to the Advisor's predecessor.
For its services, the Advisor receives a fee from the Balanced Portfolio at
an annual rate of 0.60% of its average net assets, 0.80% of the Growth
Portfolio's average net assets, 0.80% of the Small Cap Portfolio's average net
assets and 0.70% of the Mid Cap Portfolio's average net a
For the fiscal year ended October 31, 1999, the Balanced Portfolio paid the
Advisor fees of $101,317, net of a waiver of $90,404. For the same period, the
Growth Portfolio paid the Advisor fees of $1,329,942, net of a waiver of $7,147.
For the same period, the Mid Cap Portfolio accrued advisory fees of $58,869, all
of which were waived. For the same period the Small Cap Portfolio paid the
Advisor fees of $1,789,614, net of a waiver of $3,878.
B-15
<PAGE>
During the fiscal years ended October 31, 1998 and 1997, the Advisor earned
fees pursuant to the Advisory Agreements as follows: from the Balanced
Portfolio, $236,672 and $153,518, respectively; from the Growth Portfolio,
$1,045,893 and $838,058, respectively; and from the Small Cap Portfolio,
$1,418,731 and $1,525,768, respectively. During the period December 31, 1997
through October 31, 1998, the Advisor earned fees pursuant to the Advisory
Agreement from the Mid Cap Portfolio of $29,031. However, the Advisor has agreed
to limit the aggregate expenses of the Balanced Portfolio to 0.80% of average
net assets, the aggregate expenses of the Mid Cap Portfolio to 0.90% of average
net assets, and the aggregate expenses of the Growth and Small Cap Portfolios to
1.00% of average net assets . As a result, the Advisor paid expenses of the
Balanced Portfolio that exceeded these expense limits in the amounts of $71,076
and $91,689 during the fiscal years ended October 31, 1998 and 1997,
respectively. The Advisor paid expenses of the Growth Portfolio that exceeded
these expense limits in the amounts of $22,176 and $48,003 during the fiscal
years ended October 31, 1998 and 1997, respectively. The Advisor paid expenses
of the Small Cap Portfolio that exceeded these expense limits in the amounts of
$24,020 and $24,879 during the fiscal years ended October 31, 1998 and 1997,
respectively. The Advisor waived advisory fees in the amount of $85,951 for the
period December 31, 1997 through October 31, 1998.
Under the Advisory Agreements, the Advisor will not be liable to the
Portfolios for any error of judgment by the Advisor or any loss sustained by the
Portfolios except in the case of a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of damages will be
limited as provided in the 1940 Act) or of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
The Advisory Agreements will remain in effect for two years from their
execution. Thereafter, if not terminated, each Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Portfolio.
The Advisory Agreements are terminable by vote of the Board of Trustees or
by the holders of a majority of the outstanding voting securities of the
Portfolios at any time without penalty, on 60 days written notice to the
Advisor. The Advisory Agreements also may be terminated by the Advisor on 60
days written notice to the Portfolios. The Advisory Agreements terminate
automatically upon their assignment (as defined in the 1940 Act).
The Advisor also provides certain administrative services to the Trust
pursuant to Administration Agreements, including assisting shareholders of the
Trust, furnishing office space and permitting certain employees to serve as
officers and Trustees of the Trust. For its services, it earns a fee at the rate
of 0.20% of the average net assets of each series of the Trust.
During the fiscal years ended October 31, 1999, 1998 and 1997, the Advisor
earned fees from the Balanced Fund A of $63,395, $78,802 and $51,137,
respectively; from the Growth Fund A of $11,251, $6,338 and $1,029,
respectively; from the Small Company Growth Fund A of $2,263, $6,173 and $1,993,
respectively. For fiscal year ended October 31, 1999 and for the period December
31, 1997 through October 31, 1998, the Adviser earned fees from the Mid Cap Fund
A of $16,589 and $8,219, respectively. The Advisor has agreed to limit the
B-16
<PAGE>
aggregate expenses of the Balanced Fund A, Growth Fund A, Mid Cap Fund A and
Small Company Growth Fund A to 1.05%, 1.35%, 1.39% and 1.45% (effective May 1,
2000), respectively, of each Fund's average daily net assets. As a result, for
the fiscal year ended October 31, 1999, the Advisor waived fees and reimbursed
expenses of the Funds as follows:
Waived Reimbursed
Fees Expenses
-------- --------
Balanced Fund A $ 63,395 $172,739
Growth Fund A 11,251 60,119
Mid Cap Fund A 16,589 68,247
Small Company Growth Fund A 2,263 63,968
During the period March 31, 1999 through October 31, 1999, the Advisor
earned fees from the Growth Fund B, Small Company Growth Fund B and Mid Cap Fund
B in the amounts of $458, $59 and $124, respectively. The Advisor has agreed to
limit the aggregate expenses of the Growth Fund B, Mid Cap Fund B and Small
Company Growth Fund B to 2.10%, 2.14% and 2.30%, respectively, of each Fund's
average daily net assets. As a result, for the period March 31, 1999 through
October 31, 1999, the Advisor waived fees and reimbursed expenses of the Funds
as follows:
Waived Reimbursed
Fees Expenses
-------- --------
Growth Fund B 458 55,850
Mid Cap Fund B 124 58,374
Small Company Growth Fund B 59 60,035
The Advisor reserves the right to be reimbursed for any waiver of its fees
or expenses paid on behalf of the Funds if, within three subsequent years, a
Fund's expenses are less than the limit agreed to by the Advisor.
THE ADMINISTRATOR
The Funds and the Portfolios each pay a monthly administration fee to
Investment Company Administration, LLC for managing some of their business
affairs. Each Fund pays an annual fee of $15,000. Each Portfolio pays an annual
administration fee of 0.10% of its average net assets. Each Portfolio, other
than the Balanced Portfolio, is subject to an annual minimum administration fee
of $45,000. For the fiscal year ended October 31, 1999, the Balanced Portfolio,
Growth Portfolio, Mid Cap Portfolio and Small Cap Portfolio paid $31,954,
$167,136, $45,625 and $224,187, respectively, in administration fees. For the
fiscal year ended October 31, 1998, the Balanced Portfolio, Growth Portfolio,
Mid Cap Portfolio and Small Cap Portfolio paid $39,445, $130,737, $37,835 and
$177,341, respectively, in administration fees.
B-17
<PAGE>
THE DISTRIBUTOR
First Fund Distributors, Inc., 4455 E. Camelback Road, Suite 261E, Phoenix
AZ 85018, is the Trust's principal underwriter.
DISTRIBUTION PLANS
The Trustees and/or shareholders of the Trust have adopted, on behalf of
each Fund A, a Distribution Plan (the "A Plan") pursuant to Rule 12b-1 under the
1940 Act. The A Plan provides that each Fund A will pay a 12b-1 fee to the
Distributor at an annual rate of up to 0.25% of its average daily net assets for
expenses incurred in marketing its shares, including advertising, printing and
compensation to securities dealers or other industry professionals.
The Trustees of the Trust have adopted, on behalf of each Fund B, a
Distribution Plan (the "B Plan") pursuant to Rule 12b-1 under the 1940 Act. The
B Plan provides for the payment of a distribution fee at the annual rate of up
to 0.75% of each Fund B's average daily net assets for expenses incurred in
marketing its shares and a service fee at the annual rate of up to 0.25% of each
Fund B's average daily net assets.
The Trustees of the Trust have adopted, on behalf of each Fund C, a
Distribution Plan (the "C Plan") pursuant to Rule 12b-1 under the 1940 Act. The
C Plan provides for the payment of a distribution fee at the annual rate of up
to 0.75% of each Fund C's average daily net assets for expenses incurred in
marketing its shares and a service fee at the annual rate of up to 0.25% of each
Fund C's average daily net assets.
For the fiscal year ended October 31, 1999, the Balanced Fund A paid
$79,244 under its Plan, of which $4,189 was paid as compensation to
broker-dealers, $29,690 was compensation to the Distributor, $29,302 was
compensation to sales personnel, $3,714 was for reimbursement of advertising and
marketing materials expenses, $2,158 was for reimbursement of printing and
postage expenses and $10,191 was for miscellaneous other expenses. During the
same period, the Growth Fund A paid $14,063 under its Plan, of which $2,077 was
paid as compensation to broker-d $4,205 was compensation to the Distributor,
$4,071 was compensation to sales personnel, $455 was for reimbursement of
advertising and marketing materials expenses, $706 was for reimbursement of
printing and postage expenses and $2,549 was for miscellaneous other expenses.
During the same period, the Mid Cap Fund A paid $20,737 under its Plan, of which
$75 was paid as compensation to broker-dealers, $8,044 was compensation to the
Distributor, $7,755 was compensation to sales personnel, $802 was for
reimbursement of advertising and marketing materials expenses, $1,137 was for
reimbursement of printing and postage expenses and $2,924 was for miscellaneous
other expenses. During the same period, the Small Company Growth Fund A paid
$2,828 under its Plan, of which $343 was paid as compensation to broker-dealers,
$585 was compensation to the Distributor, $536 was compensation to sales
personnel, $288 was for reimbursement of advertising and marketing materials
expenses, $647 was for reimbursement of printing and postage expenses and $429
was for miscellaneous other expenses.
B-18
<PAGE>
For the period March 31, 1999 through October 31, 1999, the Growth Fund B
paid $1,718 under its Plan, of which $588 was compensation to the Distributor,
$573 was compensation to sales personnel, $14 was for reimbursement of
advertising and marketing materials expenses, $246 was for reimbursement of
printing and postage expenses and $297 was for miscellaneous other expenses.
During the same period, the Mid Cap Fund B paid $466 under its Plan, of which
$85 was compensation to the Distributor, $82 was compensation to sales
personnel, $6 was for reimbursement of advertising and marketing materials
expenses, $207 was for reimbursement of printing and postage expenses and $86
was for miscellaneous other expenses. During the same period, the Small Company
Growth Fund B paid $221 under its Plan, of which $32 was compensation to the
Distributor, $31 was compensation to sales personnel, $5 was for reimbursement
of advertising and marketing materials expenses, $88 was for reimbursement of
printing and postage expenses and $65 was for miscellaneous other expenses.
SHAREHOLDER SERVICES PLAN
On May 15, 1998, the Board of Trustees approved the implementation of a
Shareholder Services Plan (the "Services Plan") under which the Advisor will
provide, or arrange for others to provide, certain specified shareholder
services. As compensation for the provision of shareholder services, each Fund A
will pay the Advisor a monthly fee at an annual rate of 0.15% of the Fund's
average daily net assets. The Advisor will pay certain banks, trust companies,
broker-dealers and other financial intermediaries (each, a "Participating
Organization") out of the fees the Advisor receives from the Funds under the
Services Plan to the extent that the Participating Organization performs
shareholder servicing functions for Fund A shares owned by its customers.
During the fiscal year ended October 31, 1999, Balanced Fund A, Growth Fund
A, Mid Cap Fund A and Small Company Growth Fund A paid $47,547, $8,438, $12,442
and $1,697, respectively, in shareholder servicing fees. During the fiscal year
ended October 31, 1999, Growth Fund B, Mid Cap Fund B and Small Company Growth
Fund B paid $573, $156 and $74, respectively, in shareholder servicing fees.
DEALER COMMISSIONS
The Distributor pays a portion of the sales charges imposed on purchases of
the Fund A shares to retail dealers, as follows:
Dealer Commission
as a % of
Your investment offering price
--------------- --------------
Up to $49,000 5.00%
$50,000-$99,999 3.75
$100,000-$249,999 2.75
$250,000-$499,999 2.00
$500,000-$999,999 1.60
$1,000,000 and over *
* The Distributor pays a commission of up to 1.00% to financial institutions
that initiate purchases of $1 million or more.
B-19
<PAGE>
CUSTODIAN AND AUDITORS
The Trust's custodian, Provident National Bank, 200 Stevens Drive, Lester,
PA 19113 is responsible for holding the Funds' assets. Provident Financial
Processing Corporation, 400 Bellevue Parkway, Wilmington, DE 19809, acts as each
Fund's transfer agent; its mailing address is P.O. Box 8943, Wilmington, DE
19899. The Trust's independent accountants, PricewaterhouseCoopers, LLP, assist
in the preparation of certain reports to the Securities and Exchange Commission
and the Funds' tax returns.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreements state that in connection with its duties to arrange
for the purchase and the sale of securities held by the Portfolios by placing
purchase and sale orders for the Portfolios, the Advisor shall select such
broker-dealers ("brokers") as shall, in its judgment, achieve the policy of
"best execution," i.e., prompt and efficient execution at the most favorable
securities price. In making such selection, the Advisor is authorized in the
Advisory Agreements to consider the reliability, integrity and financial
condition of the broker. The Advisor also is authorized by the Advisory
Agreements to consider whether the broker provides research or statistical
information to the Portfolios and/or other accounts of the Advisor. The Advisor
may select brokers who sell shares of the Portfolios or the Funds which invest
in the Portfolios.
The Advisory Agreements state that the commissions paid to brokers may be
higher than another broker would have charged if a good faith determination is
made by the Advisor that the commission is reasonable in relation to the
services provided, viewed in terms of either that particular transaction or the
Advisor's overall responsibilities as to the accounts as to which it exercises
investment discretion and that the Advisor shall use its judgment in determining
that the amount of commissions paid are reasonable in relation to the value of
brokerage and research services provided and need not place or attempt to place
a specific dollar value on such services or on the portion of commission rates
reflecting such services. The Advisory Agreements provide that to demonstrate
that such determinations were in good faith, and to show the overall
reasonableness of commissions paid, the Advisor shall be prepared to show that
commissions paid (i) were for purposes contemplated by the Advisory Agreements;
(ii) were for products or services which provide lawful and appropriate
assistance to its decision-making process; and (iii) were within a reasonable
range as compared to the rates charged by brokers to other institutional
investors as such rates may become known from available information. During the
fiscal year ended October 31, 1999, the Balanced Portfolio paid $33,433 in
brokerage commissions, of which $2,372 was paid to brokers who furnished
research services. During the fiscal year ended October 31, 1998, the Balanced
Portfolio paid $34,286 in brokerage commissions, of which $319 was paid to
brokers who furnished research services. During the fiscal year ended October
31, 1999, the Growth Portfolio paid $214,042 in brokerage commissions, of which
$17,604 was paid to brokers who furnished research services. During the fiscal
year ended October 31, 1998, the Growth Portfolio paid $165,841 in brokerage
commissions, of which $2,255 was paid to brokers who furnished research
services. During the fiscal year ended December 31, 1999, the Small Cap
B-20
<PAGE>
Portfolio paid $341,189 in brokerage commissions, of which $25,493 was paid to
brokers who furnished research services. During the fiscal year ended December
31, 1998, the Small Cap Portfolio paid $208,083 in brokerage commissions, of
which $10,766 was paid to brokers who furnished research services. During the
fiscal year ended December 31, 1999, the Mid Cap Portfolio paid $22,029 in
brokerage commissions, of which $234 was paid to brokers who furnished research
services. During the period December 31, 1997 through October 31, 1998, the Mid
Cap Portfolio paid $15,377 in brokerage commissions, of which $921 was paid to
brokers who furnished research services. During the fiscal year ended October
31, 1997, the Balanced Portfolio, Growth Portfolio and Small Cap Portfolio paid
brokerage commissions in the amounts of $24,471, $110, 376 and $218,0897,
respectively.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Portfolios in the valuation of the Portfolios'
investments. The research which the Advisor receives for the Portfolios'
brokerage commissions, whether or not useful to the Portfolios, may be useful to
it in managing the accounts of its other advisory clients. Similarly, the
research received for the commissions of such accounts may be useful to the
Portfolios.
The debt securities which will be a major component of the Balanced
Portfolio's portfolio are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission although the
price of the security usually includes a profit to the dealer. Money market
instruments usually trade on a "net" basis as well. On occasion, certain money
market instruments may be purchased by the Portfolios directly from an issuer in
which case no commissions or discounts are paid. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
PORTFOLIO TURNOVER
Although the Funds generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in a Portfolio's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to higher transaction costs and may
result in a greater number of taxable transactions. See "Portfolio Transactions
and Brokerage." Growth Portfolio's portfolio turnover rate for the fiscal years
ended October 31, 1999 and 1998 was 80.34% and 81.06%, respectively. Balanced
Portfolio's portfolio turnover rate for the fiscal years ended October 31, 1999
B-21
<PAGE>
and 1998 was 174.19% and 111.47%, respectively. During the fiscal year ended
October 31, 1999, the Balanced Portfolio changed its asset allocation between
fixed-income and equity securities, which resulted in a higher rate of portfolio
turnover than for the prior fiscal year. Small Cap Portfolio's portfolio
turnover rate for the fiscal years ended October 31, 1999 and1998 was 133.24%
and 81.75%, respectively. As a result of volatility in the equity markets during
the fiscal year ended October 31, 1999, the Small Cap Portfolio had a higher
rate of portfolio turnover than in the prior fiscal year. Mid Cap Portfolio's
portfolio turnover rate for the fiscal year ended December 31, 1999 and for the
period December 31, 1997 through October 31, 1998 was 144.64% and 166.89%,
respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Reference is made to "Ways to Set Up Your Account - How to Buy Shares - How
To Sell Shares" in the prospectus for additional information about purchase and
redemption of shares. You may purchase and redeem shares of each Fund on each
day on which the New York Stock Exchange ("Exchange") is open for trading. The
Exchange annually announces the days on which it will not be open for trading.
The most recent announcement indicates that it will not be open on the following
days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the Exchange may close on days not included in that announcement.
The contingent deferred sales charge imposed on Fund B and Fund C shares
does not apply to (a) any redemption pursuant to a tax-free return of an excess
contribution to an individual retirement account or other qualified retirement
plan if the Fund is notified at the time of such request; (b) any redemption of
a lump-sum or other distribution from qualified retirement plans or accounts
provided the shareholder has attained the minimum age of 70 1/2 years and has
held the Fund shares for a minimum period of three years; (c) any redemption by
advisory accounts managed by the Advisor or its affiliates; (d) any redemption
made by employees, officers or directors of the Advisor or its affiliates; (e)
any redemption by a tax-exempt employee benefit plan if continuation of the
investment would be improper under applicable laws or regulations; and (f) any
redemption or transfer of ownership of shares following the death or disability,
as defined in Section 72(m)(7) of the Internal Revenue Code (the "Code"), of a
shareholder if the Fund is provided with proof of death or disability and with
all documents required by the Transfer Agent within one year after the death or
disability.
NET ASSET VALUE
The net asset value of the Portfolios' shares will fluctuate and is
determined as of the close of trading on the Exchange (normally 4:00 p.m.
Eastern time) each business day. Each Portfolio's net asset value is calculated
separately.
The net asset value per share is computed by dividing the value of the
securities held by each Portfolio plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of interests in the Portfolio
outstanding at such time.
Equity securities listed on a national securities exchange or traded on the
NASDAQ system are valued on their last sale price. Other equity securities and
debt securities for which market quotations are readily available are valued at
the mean between their bid and asked price, except that debt securities maturing
within 60 days are valued on an amortized cost basis. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
B-22
<PAGE>
TAXATION
The Funds will each be taxed as separate entities under the Code and each
intends to elect to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Code. In each taxable year that the Funds
qualify, the Funds (but not their shareholders) will be relieved of federal
income tax on that part of their investment company taxable income (consisting
generally of interest and dividend income, net short-term capital gain and net
realized gains from currency transactions) and net capital gain that is
distributed to shareholders.
In order to qualify for treatment as a RIC, the Funds must distribute
annually to shareholders at least 90% of their investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of each Fund's gross income each taxable year must
be derived from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income derived with respect to its business of investing in
securities or currencies; (2) at the close of each quarter of each Fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government securities, securities of other RICs and
other securities, limited in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund and that does not represent more than 10%
of the outstanding voting securities of such issuer; and (3) at the close of
each quarter of each Fund's taxable year, not more than 25% of the value of its
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
DIVIDENDS AND DISTRIBUTIONS
Dividends from a Fund's investment company taxable income (whether paid in
cash or invested in additional shares) will be taxable to shareholders as
ordinary income to the extent of the Fund's earnings and profits. Distributions
of a Fund's net capital gain (whether paid in cash or invested in additional
shares) will be taxable to shareholders as long-term capital gain, regardless of
how long they have held their Fund shares.
Dividends declared by a Fund in October, November or December of any year
and payable to shareholders of record on a date in one of such months will be
deemed to have been paid by the Fund and received by the shareholders on the
record date if the dividends are paid by a Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
Each Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. Each Fund also is required to withhold 31% of
all dividends and capital gain distributions paid to such shareholders who
otherwise are subject to backup withholding.
B-23
<PAGE>
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in a Fund's advertising and
promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
The Funds' return computed at the public offering price (using the maximum
sales charge for Fund A shares and the applicable CDSC for Fund B shares) for
the periods ended October 31, 1999 are set forth below:
AVERAGE ANNUAL TOTAL RETURN
One Year Five Years Life of Fund*
-------- ---------- -------------
Balanced Fund A 12.35% 16.59% 13.20%
Growth Fund A 23.55% N/A 21.08%
Mid Cap Fund A 42.05% N/A 24.57%
Small Company Growth Fund A 50.25% N/A 9.34%
----------
* The inception dates for the Funds are as follows: Balanced Fund A - June 11,
1992 ; Growth Fund A - February 3, 1997; Mid Cap Fund A - December 31, 1997; and
Small Company Growth Fund A - February 3, 1997.
ANNUAL TOTAL RETURN
Life of Fund*
-------------
Growth Fund B -2.51%
Mid Cap Fund B 14.72%
Small Company Growth Fund B 32.66%
----------
* The inception dates for the Funds B are March 31, 1999.
B-24
<PAGE>
YIELD
Annualized yield quotations used in a Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:
YIELD = 2 [(a-b + 1){6} - 1]
----------------------------
cd
where a equals dividends and interest earned during the period; b equals
expenses accrued for the period, net of reimbursements; c equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and d equals the maximum offering price per share on the last
day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), a Fund calculates interest earned on each
debt obligation held by it during the period by (1) computing the obligation's
yield to maturity, based on the market value of the obligation (including actual
accrued interest) on the last business day of the period or, if the obligation
was purchased during the period, the purchase price plus accrued interest; (2)
dividing the yield to maturity by 360 and multiplying the resulting quotient by
the market value of the obligation (including actual accrued interest). Once
interest earned is calculated in this fashion for each debt obligation held by a
Fund, net investment income is then determined by totaling all such interest
earned.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
OTHER INFORMATION
Performance data of a Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return and principal value of an investment in a Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount. In advertising and promotional materials a Fund may
compare its performance with data published by Lipper Analytical Services, Inc.
("Lipper") or CDA Investment Technologies, Inc. ("CDA"). A Fund also may refer
in such materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper or CDA.
Advertising and promotional materials also may refer to discussions of a Fund
and comparative mutual fund data and ratings reported in independent periodicals
including, but not limited to, The Wall Street Journal, Money Magazine, Forbes,
Business Week, Financial World and Barron's.
B-25
<PAGE>
GENERAL INFORMATION
Each Fund is a diversified series of the Trust, which is an open-end
investment management company, organized as a Delaware business trust on
December 11, 1991. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interest in a Fund. Each share
represents an interest in a Fund proportionately equal to the interest of each
other share. Upon the Trust's liquidation, all shareholders would share pro rata
in the net assets of the Fund in question available for distribution to
shareholders. If they deem it advisable and in the best interest of
shareholders, the Board of Trustees may create additional series of shares which
differ from each other only as to dividends. The Board of Trustees has created
twelve series of shares, and may create additional series in the future, which
have separate assets and liabilities. Income and operating expenses not
specifically attributable to a particular Fund are allocated fairly among the
Funds by the Trustees, generally on the basis of the relative net assets of each
Fund.
Prior to October 31, 1999, the Provident Investment Counsel Funds A were
called Provident Investment Counsel Pinnacle Balanced Fund, Provident Investment
Counsel Pinnacle Growth Fund, Provident Investment Counsel Pinnacle Mid Cap Fund
and Provident Investment Counsel Pinnacle Small Company Growth Fund.
Each Fund is one of a series of shares, each having separate assets and
liabilities, of the Trust. The Board of Trustees may at its own discretion,
create additional series of shares. The Declaration of Trust contains an express
disclaimer of shareholder liability for its acts or obligations and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for its obligations.
The Declaration of Trust further provides the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares) and may vote in the election of Trustees
and on other matters submitted to meetings of shareholders. It is not
contemplated that regular annual meetings of shareholders will be held. Rule
18f-2 under the 1940 Act provides that matters submitted to shareholders be
approved by a majority of the outstanding securities of each series, unless it
is clear that the interests of each series in the matter are identical or the
matter does not affect a series. However, the rule exempts the selection of
accountants and the election of Trustees from the separate voting requirements.
Income, direct liabilities and direct operating expenses of each series will be
B-26
<PAGE>
allocated directly to each series, and general liabilities and expenses of the
Trust will be allocated among the series in proportion to the total net assets
of each series by the Board of Trustees.
The Declaration of Trust provides that the shareholders have the right,
upon the declaration in writing or vote of more than two-thirds of its
outstanding shares, to remove a Trustee. The Trustees will call a meeting of
shareholders to vote on the removal of a Trustee upon the written request of the
record holders of ten per cent of its shares. In addition, ten shareholders
holding the lesser of $25,000 worth or one per cent of the shares may advise the
Trustees in writing that they wish to communicate with other shareholders for
the purpose of requesting a meeting to remove a Trustee. The Trustees will then,
if requested by the applicants, mail at the applicants' expense the applicants'
communication to all other shareholders. Except for a change in the name of the
Trust, no amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of more than 50% of its outstanding shares. The
holders of shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth above. The Trust may be
terminated upon the sale of its assets to another issuer, if such sale is
approved by the vote of the holders of more than 50% of its outstanding shares,
or upon liquidation and distribution of its assets, if approved by the vote of
the holders of more than 50% of its outstanding shares. If not so terminated,
the Trust will continue indefinitely.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
FINANCIAL STATEMENTS
The annual report to shareholders for the Funds A and Funds B for the
fiscal year ended October 31, 1999 is a separate document supplied with this
SAI, and the financial statements, accompanying notes and report of independent
accountants appearing therein are incorporated by reference into this SAI.
B-27
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP: CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
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<PAGE>
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-29
